What novation is
Novation is not a transfer of an existing contract but the replacement of one contract with another. As Lord Selborne LC put it in Scarf v Jardine (1882) 7 App Cas 345, a new contract is substituted for the existing one, the consideration being the mutual discharge of the old. It requires three things: the consent of all three parties (outgoing, incoming, and remaining), consideration (the mutual release and assumption usually suffices), and an intention to extinguish the old contract and create a new one.
Both rights and obligations transfer - which is why novation, unlike assignment, can move the burden as well as the benefit. No particular form is required (an oral novation is valid), but executing a deed is standard practice to avoid consideration arguments and provide evidential certainty.
Novation by conduct
Novation can be inferred from conduct where that inference is needed to give business efficacy to what happened. In Musst Holdings Ltd v Astra Asset Management UK Ltd [2023] EWCA Civ 128, the change of entity had been anticipated from the outset, the new entity received invoices directly, and the arrangement only made sense as a novation - so the Court of Appeal found a novation by conduct, with no signed novation agreement.
Crucially, a novation is not a variation. A no-oral-modification clause of the kind upheld in Rock Advertising v MWB Business Exchange [2018] UKSC 24 does not prevent novation by conduct, because novation discharges the old contract rather than varying it. So a carefully drafted no-oral-modification clause is no protection against inadvertent novation.
Anti-assignment clauses must mention novation
Because novation is a distinct concept, a transfer-restriction clause that addresses assignment but not novation may fail to prevent it. In Magee v Crocker [2024] EWHC 1723 (Ch), a clause referring to assignment and dealing with rights, but not novation, did not stop a novation by conduct where the parties had discussed the new party stepping into the shoes of the old and acted accordingly.
So if you want to restrict novation, say so expressly. A prohibition on assignment, transfer, or other dealing will not automatically capture novation - reference it by name.
The accrued-rights trap
The most dangerous consequence of novation is its effect on accrued rights. Because the original contract is extinguished, accrued claims - including for pre-novation breaches - are released unless expressly preserved. In Blyth & Blyth Ltd v Carillion Construction Ltd [2001] 79 Con LR 142, a novation that purported to make the consultant liable to the incoming contractor for pre-novation services failed, because the duty at the relevant time had been owed to the employer, not the contractor.
So a novation agreement must expressly preserve the remaining party's right to claim against the outgoing party for pre-novation breaches. This is the most frequently overlooked risk in corporate-restructuring novations - and it cannot be fixed after the old contract is gone.
Guarantees, security, and drafting
Novation also cascades onto related instruments. Guarantees can be discharged when the underlying contract is novated, because altering the guaranteed obligation can release the guarantor; security over the old contract is similarly released. Fresh guarantees and security must be re-papered alongside the novation - an expensive step in cross-border deals with notarial requirements.
So draft the novation deliberately: a tripartite deed, an express savings clause preserving accrued rights and pre-novation claims, and re-execution of guarantees and security. Treat novation as the demolition and rebuild it is, not a simple handover.
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Practical checklist
- Use novation (not assignment) where the obligations, not just the benefit, must transfer (Scarf v Jardine (1882) 7 App Cas 345).
- Get all three parties' consent and execute a deed for certainty.
- Do not rely on a no-oral-modification clause to prevent novation by conduct (Musst Holdings [2023] EWCA Civ 128).
- Reference novation expressly in any transfer-restriction clause (Magee v Crocker [2024] EWHC 1723 (Ch)).
- Expressly preserve accrued rights and pre-novation claims in the novation agreement (Blyth & Blyth [2001] 79 Con LR 142).
- Re-paper guarantees and security, which can be discharged by the novation.
This guide is informational only and is not legal advice. It does not replace advice from licensed counsel on the facts of a specific transaction.
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